Cracks in the CAG's scanners

The Comptroller and Auditor General of India is the nation's supreme audit
institution. It is widely respected for its unshaken independence in
auditing government expenditure. But in its scrutiny of Karnataka's Gerusoppa dam,
it let off the Karnataka Power Corporation on two key counts.
Himanshu Upadhyaya
interprets the CAG's 2004 report.

In its 2004 report, the Comptroller and Auditor General of India (CAG) criticised the Karnataka Power Corporation Limited (KPCL) for huge cost and time overrun on its 240 MW Gerusoppa Dam power project over river Sharvathy. The river Sharvathy is an important west flowing river in Karnataka, dotted with a series of dams built in it's valley for power generation. The Gerusoppa Dam, a 56 metre high and 545 metre long dam located near Gerusoppa village is the last in the series of dams built across the river. The powerhouse is at the toe of the dam on right bank of the river with four generating units each of 60 MW.

The CAG report pointed out that the steep increase in the cost of the project had increased the cost of generation from 27 paise to 269 paise per unit (10 fold).
However, the CAG failed to integrate environmental concerns with focus on accountability. Even in the financial sphere, it failed to take cognisance of the fact that financial efficiency in government infrastructure projects would continue to be a casualty if the Central Electricity Authority (CEA), Planning Commission and Power Finance Corporation (PFC) continue to condone project owners willfully not
revising cost estimates, as in the Gerusoppa case.

The project's long road to completion

The Detailed project Report (DPR) prepared way back in 1981 envisaged the commencement of works in November 1989 and completion of works by November 1994. The estimated cost of the project was put at Rs 145.42 crores (at 1981 prices levels), the costs of generation estimated was 27 paise per unit and the selling price was put at 31 paise per unit in the DPR.
(1 crore = 10 million)

The project needed clearance 700 hectares of forest land, for which environmental approval was originally granted in March 1987. Soon after came the Techno Economic Clearance from CEA in May 1987. The Public Investment Board accorded its administrative approval for Rs 212 crores in August 1987. The project was to enjoy World Bank assistance and a loan of US$ 130 Million was sanctioned by the Bank.

KPCL appeared unmoved by the prospect that active litigation over forest land could end up slowing down the dam project. Instead of holding off, it went ahead with tendering process, which was to cost the power company (and hence the public) dear later.

But in June 1988, environmentalists filed a writ petition before the High Court of Karnataka. The environmentalists raised questions on the submergence of forests and petitioned that carrying out the works for the project was in violation of Forest Conversation Act, 1980.
KPCL appeared unmoved by the petitioners' concerns and went ahead.
It began the tendering process in January 1989 for major hydraulic and electrical equipment. The High Court of Karnataka then stayed the clearance of forests in September 1989. Even as the matter was sub-judice, the corporation inked the contract on the dam construction in November 1989. Work on the project commenced!

In August 1989, the construction of powerhouse was awarded to Chinna Nachimuttu Construction Company Limited, Bangalore at a cost of Rs 16.36 crore. Similarly, in November 1989 the work for construction of dam was entrusted to Naveen Mechanised Construction Company (Private) Limited, Hubli at a cost of Rs 51.84 crore. Order for the power generating unit was placed on the public sector Bharat Heavy Electricals Ltd (BHEL) at a cost of Rs 28.48 crore in February 1990. Scheduled completion for the construction of power house and dam was put at 54 months and 60 months respectively, and the delivery of generating unit was to be completed within 36 months.
(None of these deadlines were to going to hold.)

Because of the High Court stay order on the use of forest land, work slowed down. The progress of work was "interrupted/retarded" - as the CAG puts it - "due to availability of only 60 hectares of land, non-availability of designated quarry, agitations by environmentalists and stay order of the court". The status worsened and works had come to a complete standstill on August 1992, this time due to the withdrawal of forest clearance by the Central Government. Things remained in this state for a year.

In August 1993, the World Bank stopped the release of its loan due to slow progress. But in September 1993, Ministry of Environment and Forests accorded a fresh forest clearance for release of 700 hectares and the works were to resume.

Though the fresh clearance came handy to KPCL to press forward, the initial steam was lost, as the contractors developed cold feet and demanded compensation and extension of time for execution of balance works. Ignoring
the legal ramifications of the High Court case earlier, KPCL had awarded the contracts for works. It could now take a re-tendering approach, to finish the project sooner. But it allowed the original contractors to continue the works, pending final decisions on revision of rates, compensation claims etc., as demanded by them.

Another four years were spent in the process of negotiations with the contractors and deliberations within the KPCL at various levels. Fresh agreements with contractors were signed in August/September 1997 de-linking the issues of compensation claims. The cost of unfinished works amounted to Rs 134.31 crore for dam and Rs 37.16 crore for power house. By 2001, KPCL's website claimed that the total project cost was Rs 531 crore.

The withdrawal of World Bank had a left a credit vaccum; KPCL, however, availed a loan of Rs 180 crore from Power Finance Corporation in the year 1995.

The estimated cost of the project at commencement and the actual expenditure up until December 31, 2002 is detailed in the table below. From the CAG's report, it also appears that final bills and compensation claims remained to be settled as on March 31, 2003.

Gerusoppa Dam power project

CAG's review

To CAG's criticism of huge time and cost overrun with its consequent impact on the cost of generation,
the Karnataka state government responded that though KPCL had considered option of re-tendering the work,
it did not proceed due to the threat of litigation which would have further delayed the work by several
years. The government also explained that the "increase in tariff was due to non-inclusion of Interest
during construction at DPR stage as per the practice prevalent in those days and subsequent changes in
the parameters for calculating tariff."

But the startling fact revealed in the CAG's audit review is that KPCL "did not prepare revised estimates
at any time from DPR to completion stage". This also shows why it is difficult for outsiders to easily
find numbers regarding the updated and final costs of this project, except through numbers disclosed as
expenditures. And yet, KPCL was bestowed with a loan of Rs 180 crore from the Power Finance Corporation!
Such a state of affairs raises concerns on public finance and accountability grounds.

Revised cost estimates to bring them in line with current levels would have meant applying for fresh techno economic clearance (TEC) from Central Electricity Authority, and getting them approved from the Planning Commission. This would have also meant the question of economical viability of the project in terms of the fresh data indicating higher level of expenditure. One important question is how could the mandatory requirement of getting a fresh TEC for the increased level of expenditure from CEA have been bypassed by KPCL, even as it listened to contractors' complaints and extended them favours.

But this practice of bypassing fresh clearance procedures is not unique to KPCL and Karnataka. It has emerged as a trend in many privatised hydropower projects and the number of instances are alarming.

In the case of Maheshwar hydroelectric project, the costs have shot up to Rs 2233 crores today, while the project has a TEC approved for expenditure upto Rs 1569 crores only. PFC extended a loan of Rs 99.32 crores in February 1999, whereas the promoters was not qualified for such an assistance as they had not yet brought in the stipulated equity at 11% of the outlay cleared in the TEC of 1996. From 1996 to 1999, S Kumars didn't carry out the revision of cost estimates.

Jaiprakash Hydro Power Limited also tried to bypass submitting the Final Financial Package to the CEA and seeking a fresh TEC for its Baspa Hydroproject in Himachal Pradesh. The firm colluded with the HP State Electricity Board and signed a supplementary agreement, which was later challenged by the Himachal Pradesh Electricity Regulatory Commission. JHPL then sought to tap the capital market by selling 18 crores shares (36.66% of pre-offer capital), though they haven't yet got the fresh TEC approval. The JHPL equity placement happened during March 22 to March 29.

Project promoters (public or private sector) are not preparing revised cost estimates, but they
continue to seek public finance. Even when they do revise estimates to negotiate with contractors and
quote figures in press releases, they don't seek approval of these estimates from the CEA and Planning
Commission, because this usually means bringing fresh data in public domain for scrutiny. But what
were the Planning Commission and the Central Electricity Authority doing as costs continued to rise
and originally approved projects later turned out to be a huge liability on the public exchequer?

By merely stating in a one liner that "(KPCL) did not prepare revised estimates at any time from DPR to
completion stage", the CAG has failed to take cognisance of the real issue. Furthermore, if the CEA,
Planning Commission and Power Finance Corporation (PFC) continue to condone the non-updating of estimates,
financial efficiency is going to continue to be a casualty in our power projects.

The second letoff

The CAG also absolved KPCL of responsibility at another front. It let KPCL off the hook in failing to meet the environmental governance standards, when it criticised the power corporation for time overrun stating: "As against the targeted period of five years, the Company took more than 12 years to complete the project. Out of this, more than two years were lost due to environmental problems, which were beyond the control of the Company. However, even after receipt of fresh environmental clearance, the Company took more than eight years to complete the project."
(Italics added for emphasis.)

Environmental governance standards means compliance with the set of laws related to environment such Forest Conservation Act, 1980, Wildlife Protection Act etc. Further, it also means that the environment impact assessment and management plan for projects are thoroughly debated with a genuine participation of affected people as mandated by EIA notification of 1994.

KPCL failed to meet these standards in going ahead with its tendering process and commencing works when a writ petition - which was to have a bearing on the work on the project - was being heard in the High Court. What is surprising is that this failure has also been condoned by the CAG. Instead of expressing concern over the lack of due diligence to environmental governance standards for accountability, the CAG attributed KPCL's woes to "interrupting or retarding" circumstances and "environmental problems, which were beyond the control of the company".

The CAG also did not express any concern with the particular position of the government that KPCL did not re-tender the project in 1993 for fear of litigation with contractors. This position contrasts ironically with KPCL's own position of going ahead with the same project in 1989 while the High Court was hearing litigation on forest clearance. This selectiveness in governments assessing threat of litigation itself gives away the lapse in standards. Litigation with contractors is considered a deterrent, but the environmental law of the land is not.

The CAG is the Supreme Audit Institution (SAI) of the country and its report on the Gerusoppa dam project shows that the body is failing to integrate environmental concerns within its own accountability mandate. The International Organisation of Supreme Audit Institutions (INTOSAI) is a global organization with SAIs of nations as members, and CAG is a member too. INTOSAI envisages that SAIs must be watchdog not only on matters of financial prudence, but going beyond this, must ensure compliance with environmental governance standards.

Ironically, the CAG is not merely a member; it is also a member on INTOSAI's working group on environmental audit. Seen in this light, CAG's condoning of KPCL's disregard for environmental clearance checks is particularly embarrassing. It is all the more important that the otherwise respected constitutional body act more stridently in cases of neglect of environmental standards by project authorities and government bodies.

Himanshu Upadhyaya17 May 2005

Himanshu Upadhyaya is an independent researcher working on Public Finance and Accountability issues.